Is Payment Giant SWIFT Preparing for a Blockchain-Related Future?

SWIFT is a payment giant. It operates in more than 200 countries, has over 11,000 financial institution clients and broadcasts approximately 8.4 billion financial messages annually. It is the world leader in cross-border bank-to-bank payments and has recently played a key role in Western economic sanctions against Russia.

This does not mean, however, that the Belgian-based cooperative is immune to disruption shocks. Critics have long argued that the interbank messaging system, founded in the 1970s, is “old, inflexible, slow and increasingly prone to cyberattacks.” In May, Mastercard CEO Michael Miebach questioned SWIFT’s ability to survive the next five years. Meanwhile, it continues to be threatened by a growing tide of blockchain-based payment networks on the one hand and an anticipated torrent of central bank digital currencies (CBDCs) on the other.

But, last week, in a sign that even entrenched legacy financial networks can (perhaps) change their stripes, SWIFT confirmed a proof-of-concept project with blockchain oracle provider Chainlink. Hopefully, SWIFT banking users could easily access and transfer digital assets across multiple blockchain platforms. Days earlier, SWIFT also announced that it was using the enterprise blockchain platform of fintech firm Symbiont to enhance its messaging for corporate events such as dividend payments and mergers.

These developments raise an intriguing question: rather than engaging in a zero-sum fight to the death, traditional finance (TradFi) and decentralized finance (DeFi) firms are indeed converging, i.e. towards a common middle ground that includes tokenized assets. , DeFi, interoperability and, yes, regulation?

Co-opt an existential threat?

“All financial assets will move through blockchain networks in the future,” Matthew Hougan, chief investment officer of Bitwise Asset Management, told Cointelegraph. “It is not surprising to see legacy companies trying to adopt and / or co-opt a technology that poses a fundamental threat to their existence; indeed, it must be applauded “.

Of course, this is only a pilot program. Hougan added: “It’s not like SWIFT has gotten the blockchain religion overnight and is converting all of its businesses to DLT.” But it’s a start, and the network should be applauded for that, she suggested.

In this rapidly changing technological world, “there is no place for binary viewpoints that embrace an ‘I win, you lose’ mentality”, especially within its capital markets and financial sector, Mark told Cointelegraph. Smith, CEO and co-founder of Symbiont, also adding:

“Ultimately, what ends up being the norm is usually a hybrid and we definitely see a fusion development that will borrow the best that TradFi and DeFi have to offer.”

Jonathan Solé, strategic director of SWIFT, speaking at last week’s Smartcon 2022 convention in New York, acknowledged an “undeniable interest” by institutional investors in digital assets “whether it’s stablecoins, CBDCs or whatever you can tokenize. on market space capital ”including stocks and bonds.

Banks and other TradFi institutions are looking for SWIFT to “bridge the gap” between their infrastructure providers, such as exchanges, custodians and clearing houses, “and all these new blockchains that will provide these services” for tokenized assets, he added. panel titled “Linking Traditional Finance and DeFi”.

The session was moderated by Chainlink CEO Sergey Nazarov, who noted that SWIFT possessed the “largest private key infrastructure in the TradFi world”, adding:

“There is no reason to get rid of that private key infrastructure that already securely signs transactions to bypass trillions of dollars worth. All of these standards may just have an addition that says: blockchain stuff “.

But SWIFT “doesn’t necessarily want to build integration with every single chain on the planet,” Nazarov added, which is why he was exploring Chainlink’s Cross-Chain Interoperability Protocol (CCIP) as a way to “become interoperable across all blockchain environments. . ”

Stephen Prosperi, Head of Product Management and Digital Securities Management at DTCC, which provides settlement and settlement services for US securities markets, another TradFi heavyweight, said this point. Different digital currencies “will live across different chains” and companies like DTCC don’t want to build separate infrastructures to connect to each of the 100 blockchains hosting desirable digital assets. A central entry point such as CCIP could therefore be useful.

Are cross chain bridges safe?

However, the Smartcon speakers did not address some of the challenges associated with cross-chain bridges, including security concerns. “Yes, there are security risks with cross-chain projects,” commented Hougan, “that’s why you need pilot projects like this.”

Cross-chain bridges are designed to solve the problem of interoperability between blockchain platforms. Blockchain networks today – Bitcoin, Ethereum, Solana and others – are like railway systems of the 19th century before track gauge dimensions were standardized. Passengers and freight had to be unloaded onto another train when incompatible rail lines were encountered.

Cross-blockchain bridges are designed to address this type of incompatibility, but the problem is that they appear to be vulnerable to hacks. According to Chainalysis, about $ 2 billion was stolen from decks in 13 separate robberies, most of it this year. Ethereum founder Vitalik Buterin also recently reported cross-chain bridges, suggesting they can enable 51% of network attacks.

A key problem appears to be that “bridges” tend to accumulate large amounts of “locked assets” from different blockchains, some quite obscure and not always built with advanced security features, according to Elliptic’s 2022 Cross-Chain Report published on October 4. , who noted:

“This has made bridges an attractive target for cybercriminals. […] From January to July 2022, $ 1.2 billion worth of cryptocurrencies was stolen in eight bridge compromise incidents. “

Chainlink supposedly believes it will do a better job with security than cross-chain bridges in the past. Nazarov said this in post-Smartcom interviews. “This is what the CCIP tries to solve. And I don’t think it’s an intractable problem. I think it’s a solvable problem, “he told Fortune.

Are traditional institutions ready for tokenization?

Besides the need for interoperability, are there any other commonalities that are bringing TradFi and blockchain providers closer together? Capital markets are ready for tokenization, for example, Nazarov asked the speakers.

“Well, it’s definitely here. She won’t go away, ”Solé replied. “We have adopted all of our messaging standards so that we can be sure we can meet the information needed for tokenized assets.”

“We are actually trying to tokenize all different types of assets internally,” Victor O’Laughlen, chief executive officer and head of corporate tokenization at Bank of New York Mellon (BNY), told the panel. The clients of BNY’s broker-dealer and investment manager “do not want to separate and manage their assets in different pools. They want to have a customer experience. ”Another attraction of blockchain-enabled tokenized assets is that they are accessible 24/7. O’Laughlen added:

“It’s the infrastructure that always stays up, right? The cryptocurrency markets have really pushed the financial markets to think about it. And we need to be able to support our customers in any time zone, anywhere. “

In addition to interoperability and tokenization, there was some interest among TradFi representatives in the actual DeFi projects, but with caveats. “If financial services want to go into DeFi mode, there has to be some sort of regulated DeFi,” Solé said, although some may see it as a contradiction in terms.

Prosperi echoed the need for some sort of “authorized DeFi”, which included compliance. they are dealing with.

However, BNY Mellon’s O’Laughlen saw some positives with DeFi protocols. “DeFi could benefit intraday liquidity, where liquidity is needed to grease the wheels.” Institutions could start by lending or borrowing assets or cash, like “some of the more vanilla types of.” [DeFi] the transactions that take place between counterparties and financial institutions would be an excellent first step “.

A boost to the adoption of cryptocurrencies

Finally, what, if anything, does all this have to do with the adoption of cryptocurrencies / blockchains? Ecumenical debates like the one at Smartcon are encouraging, but partnerships like SWIFT-Chainlink “will really accelerate the adoption of DLT blockchains and benefit various institutions across all capital markets,” as suggested by Nazarov?

“It’s good news,” Hougan told Cointelegraph. “Whenever an entrenched incumbent recognizes that they have to think about the implications of blockchain technology, it is easier for the next to do so. This is another brick in the wall.

“Chainlink has a strong competitive position in providing reliable oracles and data sources and grows by integrating these tools into multiple capital markets and payment networks,” Lex Sokolin, chief economist at ConsenSys, told Cointelegraph. “The purposes of blockchains are diverse and varied. In general, I think that greater integration implies more pathways to adoption. ”

Smith, for his part, sees a “true maturation” of blockchain technology in financial services, seeing it as the “connective tissue” that will make TradFi and DeFi successful. Blockchain technology was originally created to provide a better bank payment system and, 13 years later, “it continues to be more widely accepted and adopted by banks, wealth managers and global markets,” Smith said.